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Retailers Have New Resolve: Pare Down or Perish

Chicago's travel guides often refer to FAO Schwarz as an institution in the toy business. “What Michael Jordan is to basketball, FAO Schwarz is to toy stores,” touted one promotion. So it was with a pang of sadness that I learned in January that the famous store at 840 N. Michigan Ave. — located in the heart of the Windy City's Magnificent Mile — had closed.

When he was about 4 years old, my son Jeff and I spent many hours playing with all the latest toys in that flagship store. About once a month, Jeff and I would take the train downtown to where I worked at 35 East Wacker. Typically, we'd go shopping for an hour or so during lunch. He was too young to pronounce the store name properly. He simply knew it as FAO Shorts. “Daddy, let's go to Shorts,” he'd say and off we'd go, rain or shine. A walk to the toy store, which always included at least one purchase and a stop at Garrett's Popcorn, was a great way to spend part of the afternoon.

But nothing lasts forever. Our family has long since moved away from the Great White North. And Jeff, now 11, is more preoccupied these days with Nintendo 64 and ESPN's SportsCenter. Meanwhile, FAO Inc., which owns the FAO Schwarz and Zany Brainy toy-store chains, has run into financial trouble. The company filed for bankruptcy protection in January and plans to close 75 to 80 stores, nearly one-third of its outlets. Known for its Disney-like atmosphere but also for expensive prices, FAO Schwarz is facing fierce competition from Toys “R” Us and discounters such as Wal-Mart. Apparently, more shoppers have been playing with FAO's display toys than buying them. The company's stock price plummeted to 24 cents a share in late January, down from a 52-week high of $9.87.

A Tough Time To Be in Retail

FAO's travails are not unique in this brutal retail climate. Federated Department Stores announced in January that it planned to cut most of its Macy's stores here in Atlanta, rebrand Rich's as Rich's-Macy's and eliminate 1,500 jobs. For longtime Atlantans the worst news of all was that the flagship Macy's store at 180 Peachtree St. downtown would be closed as part of the restructuring.

The only good news is that two of the Macy's stores at Perimeter and Lenox Square malls will be converted into Bloomingdale's stores in an attempt to capture the upscale consumer. But with same-store sales over the next 12 months projected to be flat or even down 1.5%, the company had to take some drastic measures. Federated's stock price traded at $25.64 in late January, well below its 52-week high of $44.26. The fact is the two department store chains, Macy's and Rich's, have a lot of duplication in their merchandise. It's a smart, but not popular, business move.

Not to be overshadowed by any retailer when it comes to bad news, Kmart announced in January that it would close 300 stores this year after shuttering 283 stores in 2002. The positive news is that the company expects to return to profitability in fiscal 2004. Kmart is indeed struggling. Its stock traded at 14 cents a share in late January, down from its 52-week high of $1.95.

I believe that the short-term pain resulting from the empty spaces will lead to a better use of the abandoned real estate in the long run. The moves are a healthy sign in the “overstored” retail arena where over-expansion is commonplace. The New Year's resolution for many retailers seems to be pare down — or perish.